Australian shares to sink as Donald Trump’s Iran threat smashes investor confidence

Australian shares are tipped to sink again when the market reopens on Monday, as mixed messages from the White House smash investor confidence.

Overnight Saturday Australian time, US President Donald Trump announced the conflict between US/Israel and Iran was “winding down.”

But fast forward to Sunday, Mr Trump took to Truth Social to threaten a huge escalation in the conflict.

“If Iran doesn’t FULLY OPEN, WITHOUT THREAT, the Strait of Hormuz, within 48 HOURS from this exact point in time, the United States of America will hit and obliterate their various POWER PLANTS, STARTING WITH THE BIGGEST ONE FIRST! Thank you for your attention to this matter,” he wrote.

Following the statement, futures for Australia’s benchmark index the S&P/ASX 200 Index pointed to a 156-point drop on Monday, or 1.8 per cent, to 8343.

US bonds and stocks were heavily sold off Friday, feeding into the negative outlook for Monday’s trade on the ASX.

The benchmark ASX200 fell 2.2 per cent last week and is down 7.2 per cent over the past month.

In hiking interest rates last week, Australia’s central bank governor Michele Bullock revealed modelling on the Iran war had not yet been factored in.

“It is possible that the RBA’s assessment of the implications of the Middle East conflict will evolve once it has done modelling of the impact,” Westpac chief economist Luci Ellis said.

“The governor revealed in the media conference that the RBA staff have not yet done this modelling.”

The Reserve Bank signalled that the possibility an extended period of high energy prices and uncertainty would degrade supply in the Australian economy and be inflationary.

“Most other observers would see that scenario as a global recession risk with rather different policy implications,” Ms Ellis said.

“At the least, we struggle to imagine a scenario where the Strait of Hormuz remains closed for many months without sentiment and financial markets weakening considerably.”

Rising oil prices and the flow of impacts on the national economy led to more than $280bn being wiped from the local market, since the conflict began on February 28.

The Strait of Hormuz remains a key strategic point, with ships delivering around 20 per cent of the world’s oil and gas through the narrow waterway.

Since the conflict began the price of oil has surged from around $US56 ($A80) a barrel in January to over $US100 ($A142) a barrel.

AMP chief economist and head of investment strategy Shane Oliver says despite soaring oil prices, the market so far has been relatively tame.

“Global oil prices are up “just” 80 per cent from their January low (compared to the three or four fold increases of the 1970’s oil shocks) and US shares have only fallen 7 per cent and the Australian share market has had a fall of around 8 per cent – both of which would count as a mild correction.”

Mr Oliver says global bonds have also risen since the conflict began as investors factor in higher inflation and the growing likelihood of rate pain.

He forecasts additional rate pain for homeowners following back-to-back rate hikes in February and March.

“We are now forecasting one more RBA rate hike in May,” he said.

“The RBA is clearly worried about the boost to already high inflation and higher inflation expectations than the hit to growth and March quarter inflation data will show a sharp spike in inflation if petrol prices stay at current levels.